Inflation Slows in Canada to 1% Amid Slack in Economy

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Consumer price inflation in Canada slowed in September more than forecast, reflecting lower gasoline prices and an economy struggling with too much slack.

The consumer price index was 1 percent above year-earlier levels, Statistics Canada said Friday from Ottawa. That’s down from 1.3 percent in the prior two months, and lower than the average of 1.1 percent this year.

The Bank of Canada sees weak price gains as a sign the economy is running below capacity, and has been trying to drive inflation back up to its 2 percent target by keeping interest rates at historic lows. The central bank kept its key overnight rate at 0.5 percent this week after cutting it in January and July to cushion the damage from an oil-price shock.

“Headline inflation remains very tame amid a generally soft economic backdrop and a steep drop in energy prices,” Benjamin Reitzes, senior economist at BMO Capital Markets, said in a note to investors.

Slack -- or excess capacity -- in the economy will keep inflation from reaching the Bank of Canada’s 2 percent target until around mid-2017, Governor Stephen Poloz said Wednesday.

Economists surveyed by Bloomberg forecast inflation of 1.1 percent in September.

Dollar Drop

The Canadian dollar fell 0.8 percent to C$1.3193 per U.S. dollar as of 9:29 a.m. in Toronto. The currency is down about 15 percent over the past 12 months, on speculation Poloz may have to cut rates again to bring inflation back to target.

Canada’s core inflation rate -- which excludes eight volatile products such as gasoline, tobacco and mortgage interest -- remained unchanged at 2.1 percent. While the core rate has been above 2 percent for 14 months, Poloz has downplayed the significance of the measure, arguing the increase reflects the temporary impact of a weaker dollar, which drives up prices for imported goods.

Gasoline prices fell 18.8 percent in September from a year earlier, after a 12.6 percent decline for August.

Fresh vegetables cost 11.5 percent more and meat gained 4.4 percent, leading a 3.5 percent increase in the food basket.

On a monthly basis, total inflation fell 0.2 percent in September and the core rate increased 0.2 percent. Economists predicted overall monthly prices would decline 0.1 percent and the core rate would rise 0.3 percent, according to the median forecasts.

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